This will be a very weird summer. By June 6th, everyone who wants a vaccine will have had at least one shot. People will still be dying of Covid, but the situation will seem much different. People will begin to act like the pandemic is over. But what will the new normal look like? We won’t know for an additional three months, not until the extended unemployment compensation expires on September 6th. Until then, we’ll have a very unusual period for the US economy. Here are some predictions. 1. Because millions of unemployed workers in low pay service sector jobs earn more on unemployment than they did on their previous jobs, and because most of those jobs are unpleasant, employment will likely remain quite depressed all summer, before bouncing back in the fall. That’s not to say the economy won’t grow.  The end of Covid makes it likely that sectors such as travel will pick up, but the quality of service will be lousy, perhaps the worst of my entire life. 2.  America will become more corrupt, with more work being done “off the books” in small businesses.  People will collect both wages and unemployment comp.  Is there “hysteresis” in corruption? 3. In a macro sense, this is like the federal government hitting the accelerator and brake at the same time. The results will be interesting–perhaps a temporary spike in inflation. The RGDP numbers will look better than the employment numbers. Productivity will look good (relative to 2019), but the productivity figures will be unsustainable. 4. For many lower-skilled younger people it will be the best summer of their life. Three months without having to work and without the fear of Covid, all paid for by Uncle Sam. 5. There’s always a price to pay for unsustainable good times, and thus I expect the public’s mood to turn sour in the fall and winter, even as employment recovers—indeed because employment recovers.  Someone has to do all those crappy jobs. PS.  Least I sound like a grouchy old guy, let me say that while the public policy here is not optimal, I’m not displeased to see young people have some fun.  Over the past year they sacrificed a lot for older people like me. Enjoy the summer everyone! PPS.  But stay off my lawn. (0 COMMENTS)

Berlin rent controllers: tear down those rent controls! Karlsruhe, Germany (dpa) – A controversial rent cap to control soaring rents in the German capital Berlin has been scrapped by the country’s Constitutional Court. The legislation had been welcomed by tenants, but panned by developers and landlords since it came into force in February 2020. Since then, the rents of around 1.5 million flats in Berlin had theoretically been frozen at June 2019 rates. The court ruled on Thursday that the Berlin government had overstepped its powers in introducing the law, as federal law governing rents was already in place. Previous federal laws had “attempted to ensure a fair balance between the interests of tenants and lessors, interests that are protected by fundamental rights” meaning that “the [German states] are precluded from passing rent legislation in this regard,” an English statement from the court said. The Berlin rent cap was therefore “void in its entirety.” This is from Robin Powell, “German Constitutional Court scraps controversial Berlin rent cap,” DPA International, April 15, 2021. HT2 Jon Miltmore. As the article makes clear, this doesn’t mean there’s no rent control in Germany. What it means is that this particularly harsh freeze on rents was found unconstitutional. In his article, Jon Miltmore writes: To make matters worse, in the absence of a free market, a “grey market” had emerged, reports say. To compensate for lost rent, landlords had begun demanding tenants pay ridiculous prices for furniture, kitchen appliances, and other basic amenities as a condition of renting, Bloomberg reported. “For example, there’s a chair here; it’ll cost you 15,000 euros,” said Thomas Schroeter of ImmoScout24, an online platform for residential and commercial real estate; “or this stove, it’ll be 10,000 euros.” I do take issue with his first four words: “To make matters worse.” The measures he discusses make matters better. When buyers and sellers figure out ways around price controls, markets come closer to clearing. It would be better, of course, not to have the rent controls: these ways around are inefficient. But they are more efficient than a passive response to rent controls. In one of the first lectures I ever saw by UCLA economist Harold Demsetz, one he gave at the University of Winnipeg in January or February 1970, he reported a study he had done of rent control in the Chicago market during World War II. One of the standard ways around rent control, he found, was to insist that the tenant buy the furniture. That was way better than the other typical response: discriminating against black people. Miltmore, by the way, lays out other bad, though entirely predictable consequences of the Berlin rent control law. (0 COMMENTS)

More specifically, what causes non-Covid recessions? Here’s Nick Rowe’s answer: At some level, Nick and I basically agree.  But I am going to answer the question slightly differently.  It’s not necessarily wrong to say recessions are caused by money hoarding, or by interest rates being set too high, or by a drop in spending on C+I+G+NX, but I don’t find any of these explanations to be the most useful way of framing the issue. In my forthcoming book (July 16, 2021), I argue that if monetary policy X is the most reasonable way to prevent recessions, then recessions are caused by not doing monetary policy X.  More specifically, I believe the most effective way to prevent recessions (except the Covid recession) is to stabilize 1-year forward NGDP growth expectations at around 4%/year.  So in that sense, recessions are caused by sharp declines in NGDP growth. As an accounting matter, NGDP is the monetary base times base velocity.  So you could say that Nick is describing the empirical fact that declines in M*V are mostly due to declines in V.  And Nick would probably agree with me that it’s the central bank’s job to offset decreases in velocity by increasing the supply of money during periods where money demand is increasing.  (Lower velocity is equivalent to higher money demand.) The basic monetary model of recessions is symmetrical, and thus falling NGDP could be produced by either an increased demand for money or a decreased supply of money.  That raises an interesting question.  Are recessions merely “errors of omission”, periods where the central bank fails to accommodate an increase in money demand, or are some recessions caused by declines in the growth rate of the (base) money supply. Here’s the US monetary base growth rate from 1918 to the mid-1960s: The sharp drop in base growth seems to have lagged in the 1920-21 recession, but that’s a bit misleading.  That recession was quite mild during the first 8 months of 1920, and thus the (plunging) supply of base money actually correlates pretty well with falling NGDP during the short but severe 1920-21 slump.  Base growth also turned negative in 1929-30, although velocity also declined sharply during that year.  Base growth fell especially sharply before and during the 1937-38 slump.  It also turned negative right before the 1949 recession, and the growth rate fell to roughly zero during the three Eisenhower recessions. Of course this is all very unscientific.  I’m pretty sure that in an accounting sense the money demand shocks that Nick refers to played the larger role.  I’m not arguing for a simplistic monetarist explanation of recessions.  But I’d make two additional points: 1. The various slowdowns in monetary base growth were errors of commission, not errors of omission. 2.  To some extent the accompanying slowdowns in velocity were endogenous, caused by the slowing economy, which itself was caused by the slowdown in the growth in the monetary base. Distinctions between errors of omission and errors of commission are quite fuzzy, and in my view not particularly useful. Here’s the more recent data: Now the correlation seems weaker, although in a few cases you can still see money growth slowing slightly during recessions.  Perhaps the most interesting case is 2007-08, where base growth slowed to near zero as we fell into recession, before soaring much higher in late 2008.  I’d make two points about the latter period: 1. After the Fed began paying interest on bank reserves (IOR) in late 2008, the demand for base money soared much higher.  The Fed accommodated that demand with various QE programs, which sharply boosted the growth rate of the monetary base. 2.  Even without IOR, the decline in market interest rates to near zero would have led to a big rise in money demand, i.e. a big fall in velocity. Of course the decision to pay IOR is also an “error of commission”.  Thus the Fed triggered the Great Recession in early 2008 with the error of commission of sharply reducing the growth in the monetary base, and worsened the recession in late 2008 with another error of commission—paying IOR.  That’s not to say those two errors completely explain the Great Recession; errors of omission also played a big role.  Rather it’s important to recognize that the problem was not solely errors of omission. Of course this is all just accounting.  One could also say the recession was caused by the Fed allowing NGDP growth to fall sharply.  Or that the recession was caused by the Fed not adopting a regime of 4% NGDP growth, level targeting.  Or that the recession was caused by the Fed not pegging the price of one year forward NGDP futures contracts at a level 4% above its current level (in 2008). PS.  Nick lives in Canada, which has a more stable banking system than the US and thus more stable demand for base money.  During the Great Depression, the Canadian base fell much more sharply than the US monetary base, as they did not have banking panics.  So at least in that episode, the crude monetarist model works better for Canada than the US.  Was that an error of commission?  Or should we excuse the BOC because they had to reduce their monetary base under the international gold standard?  On second thought, I guess I won’t blame the BOC for the fall in the Canadian base during the early 1930s, as the Bank of Canada did not yet exist. (0 COMMENTS)

In November 2018, I had the pleasure of having a LibertyMatters discussion on Vilfredo Pareto with Giandomenica Becchio, Rosolino Candela and Richard Wagner at the Online Library of Liberty. The title is “Liberty and Cynicism: Was Vilfredo Pareto a Liberal?”. In a sense, the discussion was about the quest for liberty and the pessimism for its success, a theme I fear is all the more cogent after Covid-19. In this regard, I recommend Rosolino Candela’s final article in the discussion. Here’s a rather uplifting bit from Rosolino’s piece: Regulators are precluded from an institutional context of private property, and therefore residual claimancy, over the profit opportunities they unintendedly generate, and the entrepreneurial incentive and economic knowledge embodied in such profit opportunities will therefore be absent to regulators. This explains the appeal to derivations by regulators to justify the existence of regulation based on the residues of its beneficiaries. Therefore, proponents of intervention can only acquire and identify knowledge that is available to them in the political setting. That is, they will be alert to political knowledge that is consistent with preserving their rents, lobbying for new interventions to correct for the failure to foresee the undesirable consequences of prior interventions, namely, consequences that threaten the benefits derived from regulation. (See Wagner 1989: 51–57.) This indeed characterizes the non-logical dynamics of the political processes. Market processes “fail” to achieve perfection, and government processes fail to mimic perfection. The absolute size and scale of government may inevitably grow, as Pareto realistically predicted. But given that individuals are residual claimants of their decision-making, both correct and incorrect, in the market process, such robustness in the market process implies that there is scope for growth and development to “outrun” the expansion of government itself. Entrepreneurs not only profit from correcting errors introduced by other market participants, but more importantly, they also profit from circumventing regulations that stifle the market process, and therefore they erode the rents accrued through government privilege. The non-logical dynamics of rent-seeking and regulatory capture cannot exist without fueling a logical, entrepreneurial response in the market process to whittle down the benefits accrued from government intervention. Pareto may have been politically realistic about the political process itself, but that doesn’t imply we should be cynical about the hope that markets can redeem us from the fate of socialism itself. Three cheers for that! Insofar as the discussion at large is concerned, I am sorry we did not have back then the second and third volumes (in English) of Fiorenzo Mornati’s excellent intellectual biography. Mornati’s work is an example of scholarship in the history of ideas and is a terrific aid in better understanding Pareto. In the third volume, Mornati stresses that what Pareto abandoned was less liberalism as such than “liberal political activism”. One of the great achievements of Mornati’s, in the first volume, is his account of Pareto’s experience as a businessman. That experience was really crucial for him to develop a realistic appreciation of Italian politics. In many places in the discussion, we stressed Pareto’s quest to achieve a better understanding of the role of irrationality in human and political affairs. As Giandomenica Becchio pointed out, “The fundamental role of irrationality in humans as individuals as well as in social groups made Pareto skeptical about the success of liberal-democratic systems, which he thought were doomed to a fatal transformation as a consequence of human irrationalism.” During the last year, I have asked myself a number of times what Pareto would have made of the public debate in the time of Covid19- of our increasing inability to cope with the tragedy of death, the tendency to “medicalize” the public debate, the many attempts (at least, in Italy) to lay the blame for the epidemic on the allegedly reckless behavior of youngsters, the faith in increasingly bestowing public funds on society as a way to mend whatever social ills, including those the pandemic brought about, the need for “magical” solutions which feed the public debate, the new role of scientists in public policy making and the transformation of some of them in “influencers” with star power. I cannot say what Pareto would have made of all of it, but I suspect it would not have made him more inclined to any optimism about the fate of liberalism. (0 COMMENTS)

I’ll be discussion leader at a colloquium the weekend after next whose topic is Canadian banking. The readings are so much fun because I’m learning so much history, mainly about banking but partly about politics, in the country I grew up in. Here’s a great passage from Charles W. Calomiris and Stephen H. Haber, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton University Press, 2014. The Bank of Montreal, however, did not always step in: it allowed smaller banks to fail. This was an important attribute of the system: unless depositors knew that they could suffer losses, they would have no incentive to monitor the behavior of the bankers. When a bank that was large enough to threaten the entire system failed, however, the Bank of Montreal stepped in to coordinate a response by other banks. This happened in 1906, when the Bank of Ontario failed, and again in 1908, when the Sovereign Bank of Canada failed. In these cases, the Bank of Montreal orchestrated takeovers of the insolvent banks. In the case of the Bank of Ontario, the process was so seamless that the failed banks’ depositors were not even aware that there was anything to be concerned about. Calomiris and Haber go on to quote from a book written in 1910: On the evening of October 12 [1906] the bankers in Toronto and Montreal heard with surprise that the Bank of Ontario had got beyond its depth and would not open its doors the next morning. Its capital was $1,500,000 and its deposits $1,200,000. The leading bankers in the dominion [DRH note: Canada was officially the Dominion of Canada in those days] dreaded the effect which the failure of such a bank might have. The Bank of Montreal agreed to take over the assets and pay all the liabilities, provided a number of other banks would agree to share with it any losses. Its offer was accepted and a representative of the Bank of Montreal took the night train for Toronto . . . . [T]he bank opened for business the next day with the following notice over its door: “This is the Bank of Montreal.” Calomiris and Haber then write: The contrast between this method of dealing with bank failures and that of the United States could not be more striking. In the United States, the ability of banks to coordinate their responses to crises was confined to collective action of particular cities’ clearinghouses, branching banks in the South, or other localized bank networks. When shocks associated with recessions raised significant liquidity problems for U.S. banks, nationwide banking panics resulted (in 1857, 1873, 1884, 1890, 1893, 1896, and 1907), even though (with the exception of the panic of 1857) these were not times of severe loss to banks or widespread bank failure. Four of those recessionary shocks (1857, 1873, 1893, and 1907) resulted in widespread suspensions of convertibility: that is, banks refused to redeem their own deposits. Because of restrictions on branch banking in the United States, the United States had a fairly primitive banking system until the 1980s.     (1 COMMENTS)

I recently watched Amazon’s 2018 series The Romanoffs.  While reviews were mixed, I thought this limited ensemble series was amazingly good overall.  Backstory: A century after the execution of the czar and his immediate family at the hands of the Bolsheviks, viewers experience eight distinct stories about descendants of Russian royalty.  None of the characters remain more than mildly Russian; they’re all highly assimilated to American or French society.  Given the Russian monarchy’s despotic reputation, you might think the modern-day Romanoffs would be depicted as nefarious or power-hungry, leaving readers to weigh nature versus nurture.  Yet there’s little sign of this.  While the starring Romanoffs are definitely more nefarious than the average human, they’re not especially nefarious for television characters. Since each episode is self-contained, you need not watch them in order.  My recommended viewing plan: Start with episode 2.  Edge of your seat, though by the end you’ll falsely assume that the whole show is about the iniquity of the Romanoff bloodline.  Next, watch episodes 1 and 7, bound together by the common theme of the continuation of the Romanoff dynasty.  The sole weak episode is the surreal and senseless third installment.  Well-done for what it is, but in the end it’s scarcely better than a dream sequence on The Sopranos. From the point of view of historiography, what’s striking is that almost every episode unequivocally condemns the 1918 execution of the whole royal family.  Most treatments I’ve read are more apologetic: “You have to understand that these Romanoffs tyrannized over Russia for centuries, and the revolutionaries wanted to ensure that they would never regain power.”  At the same time, the series never bothers to argue that for all its faults, the late Russian monarchy was vastly superior to the totalitarian Soviet hell-state that succeeded it.  The murder of five Romanoff children evokes far more horror than the murder of tens of millions of nameless Russians.  An elegant illustration of the Stalin’s alleged aphorism, “One death is a tragedy; a million deaths is a statistic.” P.S. The Caplan family will be in Nashville on April 16-19.  We’re staying next to Vanderbilt University.  If you want to meet up, email me. 🙂 (0 COMMENTS)

I am well aware we should never make any comparison between today’s well-meaning statists and Adolf Hitler. But the latter’s “table talks,” his table monologues to inner-circle guests, recorded by shorthand writers, are sometimes instructive. On October 15, 1941, for example, he explained his monetary theory (Hitler’s Table Talk, 1941-1944, Enigma Books, 1953, pp. 65-66). By happenstance, they show some resemblance with so-called Modern Monetary Theory, perhaps even more in what would likely be MMT’s political consequences. He starts with an oxymoron: inflation is not caused by money creation but by an increase in prices. His reported statement is: Inflation is not caused by increasing the fiduciary circulation. It begins on the day when the purchaser is obliged to pay, for the same goods, a higher sum than that asked the day before. The conclusion immediately follows that “one”—that is, the wise rulers—must do something: At that point, one must intervene. As common in economic history, scapegoats are found in the speculators (and profiteers and price-gougers): The currency remains stable when the speculators are put under lock and key. … excess profits must be removed from economic circulation. Economists just complicate things: All these things are simple and natural. … People go into ecstasies of confidence before the science of the great economists. Anyone who doesn’t understand is taxed with ignorance! At bottom, the only object of all these notions is to throw everything into confusion. But ordinary people, guided by the ruler, can understand in their flesh: The very simple ideas that happen to be mine have nowadays penetrated into the flesh and blood of millions. Hitler is not so far from the Keynesian idea (although not necessarily the claim of Keynes himself) that creating money will generate the production without which there would be inflation. At least, this is the logical way to interpret the statement: To give people money is solely a problem of making paper. The whole question is to know whether the workers are producing goods to match the paper that’s made. To be (very) charitable, we could read this as meaning that if there is a higher demand for money (or equivalently, a lower velocity of money), it can be produced without inflation. Caveat: The Table Talk comes from the combination of several original manuscripts in German and there has been some controversy about the accuracy of the English translation. The tone of the monologues, however, is not inconsistent with what we know of Hitler or his Mein Kampf. Moreover, to the extent that the statements partly represent the interpretation of Hitler’s inner circle, they would still say something. Albert Speer, who was Hitler’s Minister of Armaments and War Production, later described Hitler’s table talk as “rambling nonsense” (according to a Wikipedia’s citation): [Hitler] was that classic German type known as Besserwisser, the know-it-all. His mind was cluttered with minor information and misinformation, about everything. I believe that one of the reasons he gathered so many flunkies around him was that his instinct told him that first-rate people couldn’t possibly stomach the outpourings. Doesn’t this evoke some more recent politicians? (0 COMMENTS)

Late last week I got the results of my mid-term exam in Jeff Hummel’s Masters class in Monetary Theory and Policy. I got an A. (Yay!) When I told my wife, she said she would’ve been surprised if I hadn’t, given that I was the only economics professor, other than the lecturer, in the class. But if I hadn’t read any of the articles or seen and taken notes on any of the lectures, I probably wouldn’t have got more than 60%, which in a Masters class is essentially a failing grade. Anyway, I’m learning at least a few new interesting things each class. The main textbook is Lawrence H. White’s The Theory of Monetary Institutions. I like the content and I like Larry’s dry humor. Here’s a relevant section in his chapter on commodity money: In addition to the average rate of inflation, investors worry about the unpredictability of the price level or the inflation rate. Clear and meaningful measurements of unpredictability, allowing a reliable historical comparison of commodity with fiat regimes, are hard to make, basically because expectations cannot be directly observed. One important piece of evidence strongly suggests, however, that investors had greater confidence of their ability to predict the price level, at least at long horizons, under the historical gold standard: the long-maturity end of the bond market has sharply contracted with the switch to fiat standards. Risk-averse investors naturally shy away from (unindexed) securities that promise payoffs of nominal dollars 25 years in the future, if they cannot confidently forecast the purchasing power of the dollar 25 years ahead. Under the gold standard in the nineteenth century, some railroad companies found ready buyers for 50- and 100-year bonds. Today corporate bonds of 25 or more years in maturity are uncommon. As calculated by Benjamin Klein (1975, p. 480), the weighted average maturity of new corporate debt issued by US firms during the 1900-1915 period was 29.2 years; during the 1956-1972 period, it was 20.9 years. One would expect that the figure has shrunk even more since 1972. I took Ben Klein’s Ph.D. Monetary Theory course at UCLA in about 1973 when he was putting these data together. He talked about those data in class. Now to the dry humor part. Larry then writes: The main utilitarian arguments for adhering to a gold standard rest on the proposition that it more reliably preserves the purchasing power of money (gold is said to be more “trustworthy” and “honest”) than a fiat standard.7 Footnote 7: Commentators sometimes speak of the gold standard’s “mystique”. Presumably, this means that the commentator is not persuaded by history (or by such figures as those in the text) that a gold standard is more reliable than a fiat standard, and does not understand why others are.     (0 COMMENTS)

I don’t see much discussion in the media of an issue that will soon take front and center stage. In America, over 700 people die of Covid each day. Almost all of the deaths are among people who have not been vaccinated. Within a few weeks, almost all of the deaths will be among people who chose not to be vaccinated. Of course each of those deaths is just as tragic as anyone else.  But what will be the implication of that fact for public policy? For private policy? This will be an issue worth watching, and I expect a lot of disagreement between various factions (as usual). Again, this issue will blow up within weeks. BTW, most old people have already been vaccinated: I’ve been a frequent critic of almost all aspects of our approach to vaccinations.  One of my complaints has been that the system is overly complex, and that as a result the vaccines would end up going disproportionately to people who were most able to hack the system.  Now there is evidence that this group is disproportionately highly educated: That fits in with what I’ve observed in my daily life.  “Here’s what you need to tell them.”  “No one checks.”  We should have rationed by money, or perhaps by age. I’ve also been a fan of the British approach to vaccine delivery, which focused on getting as many first doses out as quickly as possible, before worrying about the second dose.  The FT reports that this approach has been a success: Some 93 per cent of recipients of the Pfizer inoculation and 87 per cent of those who had the AstraZeneca shot showed spike protein-specific antibodies, likely to have been induced by the vaccine. Responses were stronger for people who had recovered from Covid-19. “There’s increasing evidence that as a health care measure this decision to delay the vaccine has worked in the UK. We’ve got very good clinical protection from the one dose scheduling,” Moss said. I would add that if the US had adopted this approach a few months back, thousands of lives would have been saved.  When I recommend this approach for the US, people said we don’t have enough data yet.  Well, what’s the excuse today? I’ve been a long time critic of the FDA (and our broader regulatory apparatus), and it seems like hardly a day goes by without further examples of why we need to abolish this bureaucracy.  As an aside, I should apologize to Europe.  When they delayed their vaccine rollout due to a trivial blood clot issue, I remember thinking to myself, “What’s wrong with those people”.  Well, now “those people” include my fellow Americans. Here’s what I don’t get about progressives.  If a private corporation were killing even 1% as many people as the FDA is killing, there’d be cries of outrage.  So why isn’t there more outrage about the FDA?  Where are the “Defund the FDA” signs? PS.  A year ago I suggested that began by underreacting to Covid and would end up overreacting.  Check this out. (1 COMMENTS)

Whenever I want a clear-cut example of latter-day racial discrimination, I point to elite universities’ treatment of Asians.  As far as I’m concerned, the evidence is overwhelming.  The denials are not only motivated reasoning, but desperate motivated reasoning. Still, this leaves me with a puzzle.  Do I really think that elite admissions officers wake up in the morning and think, “God, I hate Asians”? I’m not a mind-reader, but I seriously doubt that they do.  Indeed, I bet that the vast majority of elite admissions officers never even consciously think, “I not overly fond of Asians.” What then is the psychological mechanism of discrimination?  It’s more like, “We’re treating Asian applicants well enough.”  Along with, “If we just admitted students on merit, this school would be majority Asian.  That’s excessive.” What admissions officers feel for Asians is not hate, nor even antipathy.  It’s exasperation.  Exasperation at what?  At Asians’ excessive success.  “These Asians keep forcing me to choose between being inequitable and being unjust.  Aargh!” I suspect that elite university discrimination against Jews often fit the same mold.  While there must have been some committed anti-Semites at the Ivies in the 20s, 30s, 40s, and 50s, they were probably outnumbered by admissions officers who were simply exasperated by Jewish students’ stellar performance.  “These Jews keep forcing me to choose between being inequitable and being unjust.  Aargh!” Does this mean that admissions officers have no hate in their hearts at all?  To repeat, I’m not a mind-reader.  Still, I can easily believe that admissions officers all over the country often wake up in the morning and think, “God, I hate people who think I’m racist against Asians.” The people who make you choose between being inequitable and being unjust are exasperating.  The people who tell you you’re unjust are the devil incarnate. (1 COMMENTS)